1 · Web view2001-09-27 · Chapter 5. Questions. Distinguish among the following concepts: Difference between cost and book value. Excess of cost over fair value. Excess of fair

Chapter 5Questions

1. Distinguish among the following concepts:(a) Difference between cost and book value.(b) Excess of cost over fair value.(c) Excess of fair value over cost.(d) Deferred excess of fair value over cost.

2. In what account is “the difference between cost and book value” recorded on the books of the investor? In what account is the “excess of cost over fair value” recorded?

3. How do you determine the amount of “the difference between cost and book value” to be allocated to a specific asset of a less than wholly owned subsidiary?

4. The parent company’s share of the fair value of the net assets of a subsidiary may exceed acquisition cost. How must this excess be treated in the preparation of consolidated financial statements?

5. Why are marketable securities excluded from the noncurrent assets to which any excess of fair value over cost is to be allocated?

6. P Company acquired a 100% interest in S Company. On the date of acquisition the fair value of the assets and liabilities of S Company was equal to their book value except for land that had a fair value of $1,500,000 and a book value of $300,000. At what amount should the land of S Company be included in the consolidated balance sheet? At what amount should the land of S Company be included in the consolidated balance sheet if P Company acquired an 80% interest in S Company rather than a 100% interest?

7. Corporation A purchased the net assets of Corporation B for $80,000. On the date of A’s purchase, Corporation B had no long-term investments in marketable securities and $10,000 (book and fair value) of liabilities. The fair values of Corporation B’s assets, when acquired, were

Current assets $ 40,000Noncurrent assets 60,000Total $ 100,000

How should the $10,000 difference between the fair value of the net assets acquired ($90,000) and the cost ($80,000) be accounted for by Corporation A?(a) The $10,000 difference should be credited to retained earnings.(b) The noncurrent assets should be recorded at $50,000.(c) The current assets should be recorded at $36,000, and the noncurrent assets should be

recorded at $54,000.(d) A current gain of $10,000 should be recognized.

8. Meredith Company and Kyle Company were combined in a purchase transaction. Meredith was able to acquire Kyle at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Meredith. After reducing noncurrent assets to zero, there was still some “negative goodwill.” Proper accounting treatment by Meredith is to report the amount as(a) An extraordinary item.(b) Part of current income in the year of combination.(c) A deferred credit.(d) Paid in capital.

9. How does the recording in the consolidated statements workpaper of the increase in depreciation that results from the allocation of a portion of the difference between cost and book value to depreciable property affect the calculation of noncontrolling interest in combined income?

Exercises

Exercise 5-1 Allocation of Cost

On January 1, 2003, Pam Company purchased an 85% interest in Shaw Company for $540,000. On this date, Shaw Company had common stock of $400,000 and retained earnings of $140,000.An examination of Shaw Company's assets and liabilities revealed that their book value was equal to their fair value except for marketable securities and equipment:

Book Value Fair ValueMarketable securities $ 20,000 $ 45,000Equipment (net) 120,000 140,000

Required:

A. Prepare a Computation and Allocation Schedule for the difference between cost and book value of equity acquired.B. Determine the amounts at which the above assets (plus goodwill, if any) will appear on the consolidated balance sheet on January 1, 2003.

Exercise 5-2 End of the Year of Acquisition Workpaper EntriesOn January 1, 2005, Payne Corporation purchased a 75% interest in Salmon Company for $585,000. A summary of Salmon Company's balance sheet on that date revealed the following:

Book Value Fair ValueEquipment $ 525,000 $ 705,000Other assets 150,000 150,000

$ 675,000 $ 855,000

Liabilities $ 75,000 $ 75,000Common stock 225,000Retained earnings 375,000

$ 675,000

The equipment had an original life of 15 years and has a remaining useful life of 10 years.

Required:For the December 31, 2005, consolidated financial statements workpaper, prepare the workpaper entry to allocate and depreciate the difference between cost and book value assuming:A. Equipment is presented net of accumulated depreciation.B. Accumulated depreciation is presented on a separate row in the workpaper and in the

consolidated statement of financial position.

Exercise 5-3 Allocation of CostPace Company purchased 20,000 of the 25,000 shares of Saddler Corporation for $525,000. On January 3, 2004, the acquisition date, Saddler Corporation's capital stock and retained earnings account balances were $500,000 and $100,000, respectively.

The following values were determined for Saddler Corporation on the date of purchase:

Book Value Fair ValueInventory $ 50,000 $ 70,000Other current assets 200,000 200,000Marketable securities 100,000 125,000Plant and equipment 300,000 330,000

Required:A. Prepare the entry on the books of Pace Company to record its investment in Saddler

Corporation.B. Prepare a Computation and Allocation Schedule for the difference between the cost and book

value in the consolidated statements workpaper.

Exercise 5-4 Allocation of Cost and Workpaper Entries at Date of AcquisitionOn January 1, 2005, Porter Company purchased an 80% interest in Salem Company for $260,000. On this date, Salem Company had common stock of $207,000 and retained earnings of $130,500.

An examination of Salem Company's balance sheet revealed the following comparisons between book and fair values:

Book Value Fair ValueInventory $ 30,000 $ 35,000Other current assets 50,000 55,000Equipment 300,000 350,000Land 200,000 200,000

Required:A. Determine the amounts that should be allocated to Salem Company's assets on the

consolidated financial statements workpaper on January 1, 2005.B. Prepare the January 1, 2005, consolidated financial statements workpaper entries to eliminate

the investment account and to allocate the difference between cost and book value.

Exercise 5-5 T-Account Calculation of Controlling Interest in Combined Net IncomeOn January 1, 2004, P Company purchased an 80% interest in S Company for $600,000, at which time S Company had retained earnings of $300,000 and capital stock of $350,000. Any difference between cost and book value was entirely attributable to a patent with a remaining useful life of 10 years.

Assume that P and S Companies reported net incomes from their independent operations of $200,000 and $100,000, respectively.

Required:Prepare a t-account calculation of the controlling interest in combined net income for the year ended December 31, 2004.

Exercise 5-6 Workpaper EntriesPark Company acquires an 85% interest in Sunland Company on January 2, 2005. The resulting difference between cost and book value in the amount of $120,000 is entirely attributable to equipment with an original life of 15 years and a remaining useful life, on January 2, 2005, of 10 years.

Required:Prepare the December 31 consolidated financial statements workpaper entries for 2005 and 2006 to allocate and depreciate the difference between cost and book value, recording accumulated depreciation as a separate balance.

Exercise 5-7 Workpaper EntriesOn January 1, 2004, Packard Company purchased an 80% interest in Sage Company for $600,000. On this date Sage Company had common stock of $150,000 and retained earnings of $400,000.

Sage Company's equipment on the date of Packard Company's purchase had a book value of $400,000 and a fair value of $600,000. All equipment had an estimated useful life of 10 years on January 2, 1999.

Required:Prepare the December 31 consolidated financial statements workpaper entries for 2004 and 2005 to allocate and depreciate the difference between cost and book value, recording accumulated depreciation as a separate balance.

Exercise 5-8 Workpaper Entries and Gain on Sale of Land

Padilla Company purchased 80% of the common stock of Sanoma Company in the open market on January 1, 2003, paying $31,000 more than the book value of the interest acquired. The difference between cost and book value is attributable to land.

Required:A. What workpaper entry is required each year until the land is disposed of?B. Assume that the land is sold on 1/1/06 and that Sanoma Company recognizes a $50,000 gain

on its books. What amount of gain will be reflected in combined income on the 2006 consolidated income statement?

C. In all years subsequent to the disposal of the land, what workpaper entry will be necessary?

Exercise 5-9 Allocation of Cost and Workpaper EntriesOn January 1, 2003, Point Corporation acquired an 80% interest in Sharp Company for $2,000,000. At that time Sharp Company had capital stock of $1,500,000 and retained earnings of $700,000. The book values of Sharp Company's assets and liabilities were equal to their fair values except for land and bonds payable. The land had a fair value of $100,000 and a book value of $80,000. The outstanding bonds were issued at par value on January 1, 1998, pay 10% annually, and mature on January 1, 2008. The bond principal is $500,000 and the current yield rate on similar bonds is 8%.

Required:A. Prepare a Computation and Allocation Schedule for the difference between cost and book

value in the consolidated statements workpaper on the acquisition date.B. Prepare the workpaper entries necessary on December 31, 2003, to allocate and depreciate

the difference between cost and book value.

Exercise 5-10 Allocation of Cost and Workpaper EntriesOn January 2, 2003, Page Corporation acquired a 90% interest in Salcedo Company for $3,500,000. At that time Salcedo Company had capital stock of $2,250,000 and retained earnings of $1,250,000. The book values of Salcedo Company's assets and liabilities were equal to their fair values except for land and bonds payable. The land had a fair value of $200,000 and a book value of $120,000. The outstanding bonds were issued on January 1, 1998, at 9% and mature on January 1, 2008. The bonds' principal is $500,000 and the current yield rate on similar bonds is 6%.

Required:A. Assuming interest is paid annually, prepare a Computation and Allocation Schedule for the

difference between cost and book value in the consolidated statements workpaper on the acquisition date.

B. Prepare the workpaper entries necessary on December 31, 2003, to allocate and depreciate the difference between cost and book value.

Exercise 5-11 Workpaper Entries for Three YearsOn January 1, 2003, Piper Company acquired an 80% interest in Sand Company for $2,276,000. At that time the capital stock and retained earnings of Sand Company were $1,800,000 and

$700,000, respectively. Differences between the fair value and the book value of the identifiable assets of Sand Company were as follows:

Fair ValueIn Excess ofBook Value

Inventory $ 45,000Equipment (net) 50,000

The book values of all other assets and liabilities of Sand Company were equal to their fair values on January 1, 2003. The equipment had a remaining useful life of eight years. Inventory is accounted for on a FIFO basis. Sand Company's reported net income and declared dividends for 2003 through 2005 are shown here:

2003 2004 2005Net Income $ 100,000 $ 150,000 $ 80,000Dividends 20,000 30,000 15,000

Required:Prepare the eliminating/adjusting entries needed on the consolidated worksheet for the years ended 2003, 2004 and 2005. (It is not necessary to prepare the worksheet.)

1) Assume the use of the cost method.2) Assume the use of the partial equity method.3) Assume the use of the complete equity method.

Exercise 5-12 Workpaper Entries and Consolidated Retained Earnings, Cost MethodA 90% interest in Saxton Corporation was purchased by Palm Incorporated on January 2, 2004. The capital stock balance of Saxton Corporation was $3,000,000 on this date, and the balance in retained earnings was $1,000,000. The cost of the investment to Palm Incorporated was $3,750,000.

The balance sheet information available for Saxton Corporation on the acquisition date revealed these values:

Book Value Fair ValueInventory (FIFO) $ 700,000 $ 800,000Equipment (net) 2,000,000 2,000,000Land 1,600,000 2,000,000

The equipment was determined to have a 15-year useful life when purchased at the beginning of 1999. Saxton Corporation reported net income in 2004 of $250,000 and $300,000 in 2005. No dividends were declared in either of those years.

Required:

A. Prepare the workpaper entries, assuming that the cost method is used to account for the investment, to establish reciprocity, to eliminate the investment account, and to allocate and depreciate the difference between cost and book value in the 2005 consolidated statements workpaper.

B. Calculate the consolidated retained earnings for the year ended December 31, 2005, assuming that the balance in Palm Incorporated's ending retained earnings on that date was $2,000,000.

Exercise 5-13 Push Down AccountingPascal Corporation purchased 90% of the stock of Salzer Company for $2,070,000 on January 1, 2005. On this date, the fair value of the assets and liabilities of Salzer Company was equal to their book value except for the inventory and equipment accounts. The inventory had a fair value of $725,000 and a book value of $600,000. The equipment had a book value of $900,000 and a fair value of $1,075,000.

The balances in Salzer Company's capital stock and retained earnings accounts on the date of acquisition were $1,200,000 and $600,000, respectively.

Required:In general journal form, prepare the entries on Salzer Company's books to record the effect of the pushed down values implied by the purchase of its stock by Pascal Company assuming that:A. Values are allocated on the basis of the fair value of Salzer Company as a whole imputed

from the transaction.B. Values are allocated on the basis of the proportional interest acquired by Pascal Company.

Exercise 5-14 Workpaper Entries and Consolidated Retained Earnings, Partial EquityA 90% interest in Saxton Corporation was purchased by Palm Incorporated on January 2, 2004. The capital stock balance of Saxton Corporation was $3,000,000 on this date, and the balance in retained earnings was $1,000,000. The cost of the investment to Palm Incorporated was $3,750,000.




Required:

A. Prepare the worksheet entries, assuming that the partial equity method is used to account for the investment, to eliminate the investment account, and to allocate and depreciate the difference between cost and book value in the 2005 consolidated statements workpaper.


Exercise 5-15 Workpaper Entries and Consolidated Retained Earnings, Complete EquityA 90% interest in Saxton Corporation was purchased by Palm Incorporated on January 2, 2004. The capital stock balance of Saxton Corporation was $3,000,000 on this date, and the balance in retained earnings was $1,000,000. The cost of the investment to Palm Incorporated was $3,750,000.




Required:A. Prepare the worksheet entries, assuming that the complete equity method is used to account

for the investment, to eliminate the investment account, and to allocate and depreciate the difference between cost and book value in the 2005 consolidated statements workpaper.


Exercise 5-16 Goodwill Impairment

On January 1, 2003, Porsche Company acquired 100 percent of Saab Company’s stock for $450,000 cash. The fair value of Saab’s identifiable net assets was $375,000 on this date. Porsche Company decided to measure goodwill impairment using comparable prices of similar businesses to estimate the fair value of the reporting unit (Saab). The information for these subsequent years is as follows:

Carrying Value of Fair Value Present value Saab’s Identifiable Saab’s Identifiable

Year of Future Cash Flows Net Assets* Net Assets

2004 $400,000 $330,000 $340,0002005 $400,000 $320,000 345,0002006 $350,000 $300,000 325,000

* Identifiable net assets do not include goodwill.

Required: Part A: For each year determine the amount of goodwill impairment, if any. Hint: You may wish to refer back to the section entitled Goodwill Impairment Test in Chapter 2.

Part B: Prepare the workpaper entries needed each year (2004 through 2006) on the consolidating worksheet to record any goodwill impairment assuming:

1. The cost or partial equity method is used.2. The complete equity method is used.

Exercise 5-17 Accounting for the Transition in Goodwill TreatmentPorch Company acquired 100% of the stock of Stairs Company on January 1, 2000 for $600,000. The management of Porch recently adopted a vertical merger strategy. On the date of the combination (immediately before the acquisition), the assets, liabilities, and stockholders’ equity of each company were as follows:

Porch StairsCurrent assets $ 400,000 $125,000Plant assets (net) 880,000 380,000Total $ 1,280,000 $ 505,000

Total Liabilities $ 300,000 $100,000Common stock, $20 par value 400,000 200,000Other contributed capital 250,000 75,000Retained earnings 330,000 130,000Total $1,280,000 $505,000

On the date of acquisition, the only item on Stairs’ balance sheet not recorded at fair value was plant assets, which had a fair value of $400,000. Plant assets had a 10 year remaining life and goodwill was to be amortized over 20 years.

In 2001, the FASB issued SFAS No. 141 and 142 and the Porch Company adopted the new statements as of January 2002. On January 1, 2002, the fair value of Stairs’ identifiable net assets was $450,000. Stairs is considered to be a reporting unit for purposes of goodwill impairment testing. Its fair value was estimated to be $550,000 on January 1, 2002, and its carrying value (including goodwill) on that date was $600,000.

Required:

1. Prepare the journal entry as of January 1, 2000, to record the acquisition of Stairs by Porch. Prepare the eliminating/adjusting workpaper entries needed to eliminate the investment account and to allocate the difference between cost and book value immediately after the acquisition.

2. Recall that although goodwill is no longer amortized under current GAAP, it was amortized for most companies in the years 2000 and 2001. Prepare the eliminating/adjusting workpaper entries needed to amortize goodwill for the years 2000 and 2001.

a. Assume the use of the cost or partial equity method on the books of the parent.b. Assume the use of the complete equity method on the books of the parent.

What is the carrying value of goodwill (unamortized balance) resulting from the acquisition of Stairs as of January 1, 2002, on the consolidated balance sheet?

3. A transitional goodwill impairment test is required on the date of adoption of the new FASB standards (to be carried out within the first six months after adoption) for preexisting goodwill. Based on the facts listed above, perform the impairment test and calculate the loss from impairment, if any. Hint: You may wish to refer back to the section entitled Goodwill Impairment Test in Chapter 2.

4. If there is an impairment of goodwill, how should it be shown in the consolidated financial statements for the year 2002? Prepare the eliminating/adjusting workpaper entry needed to record the loss from impairment, if any, in the workpapers for the year ending December 31, 2002.

5. What transitional disclosures are required in the year of initial adoption of SFAS No. 141 and 142? (You may also wish to refer to Chapter 2 to answer this question.)

Problems

Problem 5-1 Workpaper Entries and Consolidated Net Income for Two Years, Cost MethodOn January 1, 2004, Palmero Company purchased an 80% interest in Santos Company for $2,800,000, at which time Santos Company had retained earnings of $1,000,000 and capital stock of $500,000. On the date of acquisition, the fair value of the assets and liabilities of Santos Company was equal to their book value, except for property and equipment (net), which had a fair value of $1,500,000 and a book value of $600,000. The property and equipment had an estimated remaining life of 10 years. Palmero Company reported net income from independent operations of $400,000 in 2004 and $425,000 in 2005. Santos Company reported net income of $300,000 in 2004 and $400,000 in 2005. Neither company declared dividends in 2004 or 2005. Palmero uses the cost method to account for its investment in Santos.

Required:A. Prepare in general journal form the entries necessary in the consolidated statements

workpapers for the years ended December 31, 2004 and 2005.B. Prepare a schedule or t-account showing the calculation of the controlling interest in

combined net income for the years ended December 31, 2004 and December 31, 2005.

Problem 5-2 Workpaper Entries and Consolidated Net Income for Two Years, Partial Equity MethodOn January 1, 2004, Paxton Company purchased a 70% interest in Sagon Company for $1,300,000, at which time Sagon Company had retained earnings of $500,000 and capital stock of $1,000,000. On January 1, 2004, the fair value of the assets and liabilities of Sagon Company was equal to their book value except for bonds payable. Sagon Company had outstanding a $1,000,000 issue of 6% bonds that were issued at par and that mature on January 1, 2009. Interest on the bonds is payable annually, and the yield rate on similar bonds on January 1, 2004, is 10%. Paxton Company reported net income from independent operations of $300,000 in 2004 and $250,000 in 2005. Sagon Company reported net income of $100,000 in 2004 and $120,000 in 2005. Neither company paid or declared dividends in 2004 or 2005. Palmero uses the partial equity method to account for its investment in Santos.

Required:A. Prepare in general journal form the entries necessary in the consolidated statements

workpapers for the years ended December 31, 2004, and December 31, 2005.B. Prepare in good form a schedule or t-account showing the calculation of the controlling

interest in combined net income for the years ended December 31, 2004, and December 31, 2005.

Problem 5-3 Workpaper Entries and Consolidated Net Income, Complete Equity Method

Perke Corporation purchased 80% of the stock of Superstition Company for $1,970,000 on January 1, 2005. On this date, the fair value of the assets and liabilities of Superstition Company was equal to their book value except for the inventory and equipment accounts. The inventory had a fair value of $725,000 and a book value of $600,000. Sixty percent of Superstition Company's inventory was sold in 2005; the remainder was sold in 2006. The equipment had a book value of $900,000 and a fair value of $1,075,000. The remaining useful life of the equipment is seven years.

The balances in Superstition Company's capital stock and retained earnings accounts on the date of acquisition were $1,200,000 and $600,000, respectively. Perke uses the complete equity method to account for its investment in Superstition. The following financial data are from Superstition Company's records.

2005 2006Net income $ 750,000 $ 900,000Dividends declared 150,000 225,000

Required:A. In general journal form, prepare the entries on Perke Company's books to account for its

investment in Superstition Company for 2005 and 2006. B. Prepare the eliminating entries necessary for the consolidated statements workpapers in 2005

and 2006.C. Assuming Perke Corporation's net income for 2005 was $1,000,000, calculate the controlling

interest in combined net income for 2005. Problem 5-4 Eliminating Entries and Worksheets for Various Years

On January 1, 2003, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 and retained earnings of $80,000.Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows:

Fair Value In Excess Of

Book ValueEquipment $130,000Land 65,000Inventory 40,000

The book values of all other assets and liabilities of Salem Company were equal to their fair values on January 1, 2003. The equipment had a remaining life of five years on January 1, 2003, the inventory was sold in 2003.

Salem Company’s net income and dividends declared in 2003 and 2004 were as follows:Year 2003 Net Income of $100,000; Dividends Declared of $25,000

Year 2004 Net Income of $110,000; Dividends Declared of $35,000

Required:

A. Prepare a Computation and Allocation Schedule for the difference between cost and book value of equity acquired.

B. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2003. (It is not necessary to prepare the worksheet.)


C. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2004. (It is not necessary to prepare the worksheet.)


Use the following financial data for 2005 for requirements D through G.

Porter Company

Salem Company

Sales $1,100,000 $450,000Dividend income 48,000 ------- Total revenue 1,148,000 450,000Cost of goods sold 900,000 200,000Depreciation expense 40,000 30,000Other expenses 60,000 50,000 Total cost and expense 1,000,000 280,000Net income $ 148,000 $170,000

1/1 Retained earnings $ 500,000 $230,000Net income 148,000 170,000Dividends declared (90,000) (60,000)12/31 Retained earnings $ 558,000 $340,000

Cash $ 70,000 $ 65,000Accounts receivable 260,000 190,000Inventory 240,000 175,000Investment in Salem Company 850,000Land --0-- 320,000Plant and equipment 360,000 280,000 Total assets $1,780,000 $ 1,030,000

Accounts payable $ 132,000 $110,000Notes payable 90,000 30,000Capital stock 1,000,000 550,000

Retained earnings 558,000 340,000 Total liabilities and equity $ 1,780,000 $ 1,030,000

Required:

D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2005. (Hint: You can infer the method being used by the parent from the information in its trial balance.)

E. Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December 31, 2005.

F. Describe the effect on the consolidated balances if Salem Company uses the LIFO cost flow assumption in pricing its inventory and there has been no decrease in ending inventory quantities since 2003.

G. Prepare an analytical calculation of consolidated retained earnings for the year ended December 31, 2005.

Problem 5-5 Workpaper Entries and Consolidated Financial Statements On January 1, 2004, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000. At the purchase date, Stevens Company's stockholders' equity consisted of the following:

Common stock $500,000Retained earnings 190,000

An examination of Stevens Company's assets and liabilities revealed the following at the date of acquisition:

Book Value Fair ValueCash $ 90,726 $ 90,726Accounts receivable 200,000 200,000Inventories 160,000 210,000Equipment 300,000 390,000Accumulated depreciation - equipment (100,000) (130,000)Land 190,000 290,000Bonds payable (205,556) (150,000)Other 54,830 54,830 Total $ 690,000 $ 955,556

Additional Information - Date of Acquisition

Stevens Company's equipment had an original life of 15 years and a remaining useful life of 10 years. All the inventory was sold in 2004. Stevens Company purchased its bonds payable on the open market on January 10, 2004, for $150,000 and recognized a gain of $55,556.

Financial statement data for 2006 are presented here:

Palmer StevensCompany Company

Sales $ 620,000 $ 340,000Cost of sales 430,000 240,000Gross margin 190,000 100,000Depreciation expense 30,000 20,000Other expenses 60,000 35,000Income from operations 100,000 45,000Dividend income 31,500 0Net income $ 131,500 $ 45,000

1/1 Retained earnings $ 297,600 $ 210,000Net income 131,500 45,000

429,100 255,000Dividends (120,000) (35,000)12/31 Retained earnings $ 309,100 $ 220,000

Cash $ 201,200 $ 151,000Accounts receivable 221,000 173,000Inventories 100,400 81,000Investment in Stevens Company 1,000,000 Equipment 450,000 300,000Accumulated depreciation - equipment (300,000) (140,000)Land 360,000 290,000 Total assets $2,032,600 $ 855,000


Accounts payable $ 323,500 $ 135,000Bonds payable 400,000 Common stock 1,000,000 500,000Retained earnings 309,100 220,000 Total liabilities and equity $2,032,600 $ 855,000

Required:A. What method is Palmer using to account for its investment in Stevens? How can you tell?B. Prepare in general journal form the workpaper entry to allocateand depreciate the difference

between cost and book value in the December 31, 2004, consolidated statements workpaper.C. Prepare a consolidated financial statements workpaper for the year ended December 31,

2006.D. Prepare in good form a schedule or t-account showing the calculation of the controlling

interest in combined net income for the year ended December 31, 2006.

Problem 5-6 Workpaper Entries for Two Years and Sale of Equipment in Year Two

On January 1, 2004, Perini Company purchased an 85% interest in Silvas Company for $400,000. On this date, Silvas Company had common stock of $90,000 and retained earnings of $210,000. An examination of Silvas Company's assets and liabilities revealed that their book value was equal to their fair value except for the equipment.

Book Value Fair ValueEquipment $ 360,000Accumulated depreciation (120,000)

$ 240,000 $ 300,000

The equipment had an expected remaining life of six years and no salvage value. Straight-line depreciation is used.

During 2004 and 2005, Perini Company reported net income from its own operations of $80,000 and paid dividends of $50,000 in each year. Silvas Company had income of $40,000 each year and paid dividends of $30,000 on each December 31.

Accumulated depreciation is presented on a separate row in the workpaper and in the consolidated financial statements.

Required:A. Prepare eliminating entries for consolidated financial statements workpaper for the year

ended December 31, 2004, assuming:1) The cost method is used to account for the investment. 2) The partial equity method is used to account for the investment.

B. On January 1, 2005, Silvas Company sold all its equipment for $220,000. Prepare the eliminating entries for the consolidated financial statements workpaper for the year ended December 31, 2005, assuming:1) The cost method is used to account for the investment. 2) The partial equity method is used to account for the investment.

Problem 5-7 Workpaper Entries and Sale of Equipment in Year Three, Complete EquityOn January 1, 2004, Pueblo Corporation purchased a 75% interest in Sanchez Company for $900,000. A summary of Sanchez Company's balance sheet at date of purchase follows:

Book Value Fair ValueEquipment $ 720,000Accumulated depreciation (240,000) Equipment (net) 480,000 $ 660,000Other assets 450,000 450,000

$ 930,000

Liabilities $ 255,000 $ 255,000Common stock 300,000Retained earnings 375,000

$ 930,000

The equipment had an original life of 15 years and remaining useful life of 10 years. During 2004 Pueblo Corporation reported income of $237,000 and paid dividends of $150,000. Sanchez Company reported net income of $123,000 and paid dividends of $120,000. Pueblo uses the complete equity method to account for its investment in Sanchez.

Required:A. Prepare the elimination entries for the consolidated financial statements workpaper on

December 31, 2004. Accumulated depreciation is presented on a separate row in the workpaper and in the consolidated financial statements.

B. Assume that Sanchez Company disposed of all its equipment on January 1, 2006, for $450,000.(1) What amount of gain (loss) will Sanchez Company report?(2) What is the consolidated gain (loss)?(3) Prepare the workpaper entry necessary to allocate the amount of the difference between

cost and book value that was originally allocated to the equipment that has now been sold to outsiders.

(4) What workpaper entry will be necessary to allocate this difference between cost and book value in future years?

Problem 5-8 Eliminating Entries and Consolidated Net Income

Patten Corporation acquired an 85% interest in Savage Company for $3,100,000 on January 1, 2004. On this date, the balances in Savage Company's capital stock and retained earnings accounts were $2,000,000 and $700,000, respectively.An examination of Savage Company's books on this date revealed the following:

Book Value Fair ValueCurrent assets $ 650,000 $ 650,000Inventory 560,000 610,000Marketable securities 430,000 430,000Plant and equipment 1,200,000 1,600,000Land 400,000 900,000Liabilities 540,000 540,000

The remaining useful life of the plant and equipment is 10 years, and all the inventory was sold in 2004. The net income from Patten Corporation's own operations was $950,000 in 2004 and $675,000 in 2005. Savage Company's net income for the respective years was $110,000 and $180,000. No dividends were declared.

Required:

A. Prepare a Computation and Allocation Schedule for the difference between purchase price and book value of equity.

B. Prepare the consolidated statements workpaper eliminating entries for 2004 and 2005 in general journal form, under each of the following assumptions:

1) The cost method is used to account for the investment. 2) The partial equity method is used to account for the investment. 3) The complete equity method is used to account for the investment.

C. Calculate the controlling interest in combined net income for 2004 and 2005.

Problem 5-9 Workpaper Entries and Consolidated Net Income for Year of AcquisitionOn January 1, 2004, Pump Company acquired all the outstanding common stock of Sound Company for $556,000 in cash. Financial data relating to Sound Company on January 1, 2004, are presented here:

Balance Sheet Book Value Fair Value

Cash $ 104,550 $ 104,550Receivables 123,000 112,310Inventories 220,000 268,000Buildings 331,000 375,000Accumulated depreciation - buildings (264,800) (300,000)Equipment 145,000 130,000Accumulated depreciation - equipment (108,750) (97,500)Land 150,000 420,000 Total assets $ 700,000 $1,012,360

Book Value Fair ValueCurrent liabilities $ 106,000 $ 106,000Bonds payable, 8% due 1/1/2022 Interest payable on 6/30 and 12/31 300,000Common stock 200,000Premium on common stock 80,000Retained earnings 14,000 Total liabilities and equities $ 700,000

Sound Company would expect to pay 10% interest to borrow long-term funds on the date of acquisition. During 2004, Sound Company wrote its receivables down by $10,690 and recorded a corresponding loss. Sound Company accounts for its inventories at lower of FIFO cost or market. Its buildings and equipment had a remaining estimated useful life on January 1, 2004, of 10 years and 2½ years, respectively. Sound Company reported net income of $80,000 and declared no dividends in 2004.

Required:A. Prepare in general journal form the December 31, 2004, workpaper entries necessary to

eliminate the investment account and to allocate and depreciate the difference between cost and book value.

B. Assume that Pump Company's net income from independent operations in 2004 amounts to $500,000. Calculate the controlling interest in combined net income for 2004.

Problem 5-10 Workpaper Entries for Year of AcquisitionPearson Company purchased a 100% interest in Sanders Company and a 90% interest in Taylor Company on January 2, 2004, for $800,000 and $1,300,000, respectively. The account balances and fair values of the acquired companies on the acquisition date were as follows:

Sanders TaylorBook Value Fair Value Book Value Fair Value

Current assets $ 200,000 $ 200,000 $ 350,000 $ 350,000Inventory 400,000 400,000 500,000 575,000Plant and equipment (net) 300,000 350,000 600,000 600,000Land 600,000 600,000 550,000 625,000 Total $1,500,000 $2,000,000

Current liabilities $ 500,000 $ 500,000 $ 300,000 $ 300,000Bonds payable 300,000 300,000 600,000 600,000Capital stock 500,000 800,000Retained earnings 200,000 300,000 Total $1,500,000 $2,000,000

Sanders Company's equipment has a remaining useful life of 10 years. Two-thirds of Taylor Company's inventory was sold in 2004 and the rest was sold in the following year. In 2004, Sanders Company reported net income of $500,000 and declared dividends of $100,000. Taylor Company's net income and declared dividends for 2004 were $800,000 and $200,000, respectively.

Required:A. Prepare in general journal form the entries on the books of Pearson Corporation to account

for its investments in 2004.B. Prepare the elimination entries necessary in the consolidated statements workpaper for the

year ended December 31, 2004.

Problem 5-11 Eliminating Entries and Worksheets for Various Years

(Note that this is the same problem as Problem 5-4, but assuming the use of the partial equity method.)On January 1, 2003, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 and retained earnings of $80,000. Porter Company uses the partial equity method to record its investment in Salem Company. Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows:


Book ValueEquipment $130,000Land 65,000

Inventory 40,000


Salem Company’s net income and dividends declared in 2003 and 2004 were as follows:Year 2003 Net Income of $100,000; Dividends Declared of $25,000Year 2004 Net Income of $110,000; Dividends Declared of $35,000

Required:

A. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2003. (It is not necessary to prepare the worksheet.)


Use the following financial data for 2005 for requirements C through G.

Porter Company

Salem Company

Sales $1,100,000 $450,000Equity in subsidiary income 136,000 ------- Total revenue 1,236,000 450,000Cost of goods sold 900,000 200,000Depreciation expense 40,000 30,000Other expenses 60,000 50,000 Total cost and expense 1,000,000 280,000Net income $ 236,000 $170,000


Cash $ 70,000 $ 65,000Accounts receivable 260,000 190,000Inventory 240,000 175,000Investment in Salem Company 1,058,000Land --0-- 320,000Plant and equipment 360,000 280,000 Total assets $ 1,988,000 $ 1,030,000

Accounts payable $ 132,000 $110,000Notes payable 90,000 30,000

Capital stock 1,000,000 550,000Retained earnings 766,000 340,000 Total liabilities and equity $ 1,988,000 $ 1,030,000

Required:

C. Prepare a t-account calculation of the controlling and noncontrolling interests in combined income for the year ended December 31, 2005.D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2005.E. Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December 31, 2005.



Note: If you completed Problem 5-4, a comparison of the consolidated balances in this problem with those you obtained in Problem 5-4 will demonstrate that the method (cost or partial equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances.

Problem 5-12 Workpaper Entries and Consolidated Financial Statements(Note that this is the same problem as Problem 5-5, but assuming the use of the partial equity method.)

On January 1, 2004, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000. At the purchase date, Stevens Company's stockholders' equity consisted of the following:



Book Value Fair ValueCash $ 90,726 $ 90,726Accounts receivable 200,000 200,000Inventories 160,000 210,000Equipment 300,000 390,000Accumulated depreciation - equipment (100,000) (130,000)

Land 190,000 290,000Bonds payable (205,556) (150,000)Other 54,830 54,830 Total $ 690,000 $ 955,556


Stevens Company's equipment had an original life of 15 years and a remaining useful life of 10 years. All the inventory was sold in 2004. Stevens Company purchased its bonds payable on the open market on January 10, 2004, for $150,000 and recognized a gain of $55,556. Palmer Company uses the partial equity method to record its investment in Stevens Company.



Sales $ 620,000 $ 340,000Cost of sales 430,000 240,000Gross margin 190,000 100,000Depreciation expense 30,000 20,000Other expenses 60,000 35,000Income from operations 100,000 45,000Equity in subsidiary income 40,500 0Net income $ 140,500 $ 45,000

1/1 Retained earnings $ 315,600 $ 210,000Net income 140,500 45,000

456,100 255,000Dividends (120,000) (35,000)12/31 Retained earnings $ 336,100 $ 220,000

Cash $ 201,200 $ 151,000Accounts receivable 221,000 173,000Inventories 100,400 81,000Investment in Stevens Company 1,027,000 Equipment 450,000 300,000Accumulated depreciation - equipment (300,000) (140,000)Land 360,000 290,000 Total assets $2,059,600 $ 855,000


Accounts payable $ 323,500 $ 135,000Bonds payable 400,000 Common stock 1,000,000 500,000Retained earnings 336,100 220,000 Total liabilities and equity $2,059,600 $ 855,000

Required:A. Prepare in general journal form the workpaper entry to allocate and depreciate the difference

between cost and book value in the December 31, 2004, consolidated statements workpaper.B. Prepare a consolidated financial statements workpaper for the year ended December 31,

2006.C. Prepare in good form a schedule or t-account showing the calculation of the controlling


If you completed Problem 5-5, a comparison of the consolidated balances in this problem with those you obtained in Problem 5-5 will demonstrate that the method (cost or partial equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances.

Problem 5-13 Push Down AccountingOn January 2, 2004, Press Company purchased on the open market 90% of the outstanding common stock of Sensor Company for $800,000 cash. Balance sheets for Press Company and Sensor Company on January 1, 2004, just before the stock acquisition by Press Company, were:

Press Sensor Company Company

Cash $ 1,065,000 $ 38,000Receivables 422,500 76,000Inventory 216,500 124,000Building (net) 465,000 322,000Equipment (net) 229,000 185,000Land 188,000 100,000Patents 167,500 88,000 Total assets $ 2,753,500 $ 933,000

Liabilities $ 667,000 $ 249,000Common stock 700,000 300,000Other contributed capital 846,000 164,000Retained earnings 540,500 220,000 Total equities $2,753,500 $ 933,000

The full implied value of Sensor Company is to be "pushed down" and recorded in Sensor Company's books. The excess of the implied fair value over the book value of net assets acquired is allocated as follows: To equipment, 30%; to land, 20%; to patents, 50%.

Required:A. Prepare the entry on Sensor Company's books on January 2, 2004, to record the values

implied by the 90% stock purchase by Press Company.B. Prepare a consolidated balance sheet workpaper on January 1, 2004.

Problem 5-14 Push Down Accounting

On January 1, 2002, Push Company purchased an 80% interest in the capital stock of WayDown Company for $820,000. At that time, WayDown Company had capital stock of $500,000 and retained earnings of $100,000. Differences between the fair value and the book value of identifiable assets of WayDown Company were as follows:

Fair Value In Excess of Book Value

Equipment $ 125,000Land 62,500Inventory 37,500

The book values of all other assets and liabilities of WayDown Company were equal to their fair values on January 1, 2002. The equipment had a remaining life of five years on January 1, 2002, the inventory was sold in 2002. WayDown Company revalued its assets on January 2, 2002. New values were allocated on the basis of the fair value on WayDown Company as a whole imputed from the transaction.

Financial data for 2004 are presented here:

Push WayDownCompany Company

Sales $ 1,050,000 $ 400,000Dividend income 40,000 0 Total revenue 1,090,000 400,000Cost of goods sold 850,000 180,000Depreciation expense 35,000 50,000Other expenses 65,000 50,000 Total cost and expense 950,000 280,000Net income $ 140,000 $ 120,000

1/1 Retained earnings $ 480,000 $ 102,500Net income 140,000 120,000Dividends declared (100,000) (50,000)12/31 Retained earnings $ 520,000 $ 172,500

Cash $ 80,000 $ 50,000Accounts receivable 250,000 170,000Inventory 230,000 150,000Investment in WayDown 820,000 Goodwill -0- 185,000Land -0- 362,500Plant and equipment 350,000 300,000 Total assets $ 1,730,000 $1,217,500

Accounts payable $ 160,000 $ 100,000

Notes payable 50,000 20,000Capital stock 1,000,000 500,000Revaluation capital 425,000Retained earnings 520,000 172,500 Total liabilities and equity $ 1,730,000 $1,217,500

Required:A. In general journal form, prepare the entry made by WayDown Company on January 2, 2002,

to record the effect of the pushed down values implied by the purchase of its stock by Push Company assuming that values were allocated on the basis of the fair value of WayDown Company as a whole imputed from the transaction.

B. Prepare a consolidated financial statements workpaper for the year ended December 31, 2004.

C. What effect does the decision to apply the full push down approach have on the following items (compared to the case where push down accounting is not used):(1) Consolidated net income?(2) Consolidated retained earnings?(3) Consolidated net assets?(4) Noncontrolling interest in consolidated net assets?

Problem 5-15 Push Down AccountingOn January 1, 2002, Push Company purchased an 80% interest in the capital stock of Down Company for $820,000. At that time, Down Company had capital stock of $500,000 and retained earnings of $100,000. Differences between the fair value and the book value of identifiable assets of Down Company were as follows:

Fair Value In Excess of Book Value

Equipment $ 125,000Land 62,500Inventory 37,500

The book values of all other assets and liabilities of Down Company were equal to their fair values on January 1, 2002. The equipment had a remaining life of five years on January 1, 2002, the inventory was sold in 2002. Down Company revalued its assets on January 2, 2002. New values were allocated on the basis of the proportional interest acquired by Push Company.

Financial data for 2004 are presented here:

Push DownCompany Company

Sales $ 1,050,000 $ 400,000Dividend income 40,000 0 Total revenue 1,090,000 400,000Cost of goods sold 850,000 180,000

Depreciation expense 35,000 45,000Other expenses 65,000 49,000 Total cost and expense 950,000 274,000Net income $ 140,000 $ 126,000

1/1 Retained earnings $ 480,000 $ 122,000Net income 140,000 126,000Dividends declared (100,000) (50,000)12/31 Retained earnings $ 520,000 $ 198,000

Cash $ 80,000 $ 50,000Accounts receivable 250,000 170,000Inventory 230,000 150,000Investment in Down Company 820,000 Land -0- 350,000Goodwill -0- 148,000Plant and equipment 350,000 290,000 Total assets $ 1,730,000 $1,158,000

Accounts payable $ 160,000 $ 100,000Notes payable 50,000 20,000Capital stock 1,000,000 500,000Revaluation capital 340,000Retained earnings 520,000 198,000 Total liabilities and equity $ 1,730,000 $1,158,000

Required:A. In general journal form, prepare the entry made by Down Company on January 2, 2002, to

record the effect of the pushed down values implied by the purchase of its stock by Push Company assuming that values were allocated on the basis of the proportional interest acquired by Push Company.

B. Prepare a consolidated financial statements workpaper for the year ended December 31, 2004.

C. How would the consolidated balances in the workpaper prepared in requirement B compare with those prepared in the consolidated statements without proportional pushdown.

Problem 5-16 Eliminating Entries and Worksheets for Various Years

(Note that this is the same problem as Problem 5-4 and Problem 5-11, but assuming the use of the complete equity method.)On January 1, 2003, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 and retained earnings of $80,000. Porter Company uses the partial equity method to record its investment in Salem Company. Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows:


Book ValueEquipment $130,000Land 65,000Inventory 40,000


Salem Company’s net income and dividends declared in 2003 and 2004 were as follows:Year 2003 Net Income of $100,000; Dividends Declared of $25,000Year 2004 Net Income of $110,000; Dividends Declared of $35,000

Required:

A. Present the eliminating/adjusting entries needed on the consolidated worksheet for the year ended December 31, 2003. (It is not necessary to prepare the worksheet.)


Use the following financial data for 2005 for requirements C through G.

Porter Company

Salem Company

Sales $1,100,000 $450,000Equity in subsidiary income 115,200 ------- Total revenue 1,215,200 450,000Cost of goods sold 900,000 200,000Depreciation expense 40,000 30,000Other expenses 60,000 50,000 Total cost and expense 1,000,000 280,000Net income $ 215,200 $170,000


Cash $ 70,000 $ 65,000Accounts receivable 260,000 190,000Inventory 240,000 175,000Investment in Salem Company 963,600Land --0-- 320,000Plant and equipment 360,000 280,000 Total assets $ 1,893,600 $ 1,030,000

Accounts payable $ 132,000 $110,000Notes payable 90,000 30,000Capital stock 1,000,000 550,000Retained earnings 671,600 340,000 Total liabilities and equity $ 1,893,600 $ 1,030,000

Required:

C. Prepare a t-account calculation of the controlling and noncontrolling interests in combined income for the year ended December 31, 2005.D. Prepare a consolidated financial statements workpaper for the year ended December 31, 2005.E. Prepare a consolidated statement of financial position and a consolidated income statement for the year ended December 31, 2005.



Note: If you completed Problem 5-4 and Problem 5-11, a comparison of the consolidated balances in this problem with those you obtained in Problem 5-4 and Problem 5-11 will demonstrate that the method (cost or partial equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances.

Problem 5-17 Workpaper Entries and Consolidated Financial Statements(Note that this is the same problem as Problem 5-5 or Problem 5-12, but assuming the use of the complete equity method.)

On January 1, 2004, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000. At the purchase date, Stevens Company's stockholders' equity consisted of the following:



Book Value Fair ValueCash $ 90,726 $ 90,726Accounts receivable 200,000 200,000Inventories 160,000 210,000Equipment 300,000 390,000Accumulated depreciation - equipment (100,000) (130,000)Land 190,000 290,000Bonds payable (205,556) (150,000)Other 54,830 54,830 Total $ 690,000 $ 955,556


Stevens Company's equipment had an original life of 15 years and a remaining useful life of 10 years. All the inventory was sold in 2004. Stevens Company purchased its bonds payable on the open market on January 10, 2004, for $150,000 and recognized a gain of $55,556. Palmer Company uses the complete equity method to record its investment in Stevens Company.



Sales$ 620,000 $ 340,000

Cost of sales 430,000 240,000Gross margin 190,000 100,000Depreciation expense 30,000 20,000Other expenses 60,000 35,000Income from operations 100,000 45,000Equity in subsidiary income 35,100 0Net income 135,100 $ 45,000

1/1 Retained earnings $ 209,800 $ 210,000

Net income 135,100 45,000344,900 255,000

Dividends (120,000) (35,000)12/31 Retained earnings $ 224,900 $ 220,000

Cash $ 201,200 $ 151,000Accounts receivable 221,000 173,000Inventories 100,400 81,000Investment in Stevens Company 915,800Equipment 450,000 300,000Accumulated depreciation - equipment (300,000) (140,000)Land 360,000 290,000 Total assets $1,948,400 $ 855,000


Accounts payable $ 323,500 $ 135,000Bonds payable 400,000Common stock 1,000,000 500,000Retained earnings 224,900 220,000 Total liabilities and equity $1,948,400 $ 855,000

Required:A. Prepare in general journal form the workpaper entry to allocate and depreciate the difference

between cost and book value in the December 31, 2004, consolidated statements workpaper.B. Prepare a consolidated financial statements workpaper for the year ended December 31,

2006.C. Prepare in good form a schedule or t-account showing the calculation of the controlling


If you completed Problem 5-5 and Problem 5-12, a comparison of the consolidated balances in this problem with those you obtained in Problem 5-5 and Problem 5-12 will demonstrate that the method (cost, partial equity, or complete equity) used by the parent company to record its investment in a consolidated subsidiary has no effect on the consolidated balances.

Problem 5-18 Impact on Future Profits and In-process R&D

The Mcquire Company is considering acquiring 100% of the Sosa Company. The management of Mcquire fears that the acquisition price may be too high Condensed financial statements for Sosa Company for the current year are as follows:

Income Statement 2008Revenues $100,000Cost of Goods Sold 40,000Gross Margin 60,000

Operating Expenses 35,000Pretax Income 25,000Income Tax Expense 10,000Net Income 15,000

Balance SheetYear ended

12/31/07Year Ended

12/31/08Cash $4,000 $4,000Receivables 10,000 14,000Inventory 31,000 27,000Fixed Assets (net) 50,000 55,000Total Assets $95,000 $100,000

Current Liabilities $15,000 $17,000Long-term Liabilities 25,000 18,000Common Stock 20,000 20,000Retained Earnings 35,000 45,000Total Liabilities and Equity $95,000 $100,000

You believe that Sosa might be currently acquired at a price resulting in a price to earnings (P/E) ratio of 8 to 12 times. Also, the fair market value of Sosa’s net assets is approximately $105,000, and the difference between fair value and book value is due solely to depreciable assets with a remaining useful life of 10 years. Sosa Company is heavily involved in research and development of new baseball bats that enable the batter to hit the ball further. You estimate that $30,000 of the acquisition price might be classified as in-process R&D and thus expensed in the year of acquisition. Sosa’s net income is expected to grow an average of 10 percent per year for the next 10 years and remain constant thereafter. Required:1. If the acquisition occurs on January 1, 2009, determine the amount of income from Sosa Company that would be included in combined income assuming the following P/E ratios are used to determine the acquisition price, based on earnings for the year 2005.a. P/E ratio = 10b. P/E ratio = 12

2. If the FASB changes the current rules and requires that in-process R&D be capitalized and amortized over 20 years, how would this change your answer to part 1?

Problem 5-19 Deferred Tax Effects On January 1, 2005, Pruitt Company Pruitt Company issued 25,500 shares of its common stock in exchange for 85% of the outstanding common stock of Shah Company. Pruitt's common stock had a fair value of $28 per share at that time. Pruitt Company uses the cost method to account for its investment in Shah Company and files a consolidated income tax return. A schedule of the Shah Company assets acquired and liabilities assumed at book values (which are equal to their tax bases) and fair values follows.

Book Value/Item Tax Basis Fair Value ExcessReceivables (net) $125,000 $ 125,000 $--0--Inventory 167,000 195,000 28,000Land 86,500 120,000 33,500Plant assets (net) 467,000 567,000 100,000Patents 95,000 200,000 105,000 Total $940,500 $1,207,000 $266,500

Current liabilities $ 89,500 $ 89,500 $--0--Bonds payable 300,000 360,000 60,000Common stock 120,000Other contributed capital 164,000Retained earnings 267,000 Total $940,000

Additional Information:1. Pruitt's income tax rate is 35%.2. Shah's beginning inventory was all sold during 2005.3. Useful lives for depreciation and amortization purposes are:

Plant assets 10 yearsPatents 8 yearsBond premium 10 years

4. Pruitt uses the straight-line method for all depreciation and amortization purposes.

Required:A. Prepare the stock acquisition entry on Pruitt Company's books.B. Assuming Shah Company earned $216,000 and declared a $90,000 dividend during 2005, prepare the eliminating entries for a consolidated statements workpaper on December 31, 2005.C. Assuming Shah Company earned $240,000 and declared a $100,000 dividend during 2006, prepare the eliminating entries for a consolidated statements workpaper on December 31, 2006.

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1 · Web view2001-09-27 · Chapter 5. Questions. Distinguish among the following concepts: Difference between cost and book value. Excess of cost over fair value. Excess of fair